The Ugly Face of Shareholder Value Exposed By Inversions

Something strange is happening to familiar American companies: Burger King has become Canadian, Pfizer seems to be trying to be British, and Walgreens has backed away from becoming Swiss only because of the outcry over their plan for a new nationality. Seeing what our companies are willing to do to escape paying income tax, people are beginning to wonder about how American our American companies are.

And when, in addition, these corporate actions are praised, and are described as what American companies should do, or even must do, people begin to wonder if something is seriously wrong--and they are right to wonder.

Inversions may or may not be important in themselves, but understanding the forces that drive corporate inversions reveals a surprising amount about the cause of two major problems; the problem of extreme income inequality and the problem of stagnating wages in America.

The driving force behind inversions was described very clearly by George Will in a recent Washington Post column. Writing a defense of inversions, George Will stated, "A publicly held corporation's responsibility is to its shareholders; its fiduciary duty is to maximize the value of their holdings."

From this statement it follows immediately that it is a corporation's "fiduciary duty" to do inversions, or for that matter, anything else, if it will lift share price.

But George Will's statement, although it is widely believed, is not accurate. There is no legal obligation, no "fiduciary duty" requiring corporations to focus on maximizing shareholder value. The reality is quite different; the reality is that shareholders and their managements have freely chosen this corporate direction. And, as we will see below, there is considerable evidence that this direction has been devastating for the country.

This focus on shareholder value is relatively new. As late as 1981 the Business Roundtable, an extremely influential organizations of major corporate CEO's, listed six constituencies they needed to consider in making their corporate decisions. The six constituencies were: customers, employees, communities, society at large, suppliers and shareholders. About these constituencies they wrote:

"Carefully weighing the impacts of decisions and balancing different constituent interests - in the context of both near term and long-term effects - must be an integral part of the corporation's decision-making and management process."

But over the course of the 1980s, our corporations changed direction in a major way. Today both the Business Roundtable and most corporations would accept George Will's statement as an obvious truth.

Given this current and widely accepted focus on shareholder value, it is both reasonable and illuminating to ask who actually benefits from that focus. Who are the shareholders? Who benefits when the stock price goes up?

Certainly corporate leaders themselves are among the beneficiaries as they are now compensated mainly by massive stock options. But although very visible, and very highly compensated, they are still a small group. Where does most of the benefit of increased stock price go? Who owns the stock in American companies?

While it is true and often stated that a good percentage of Americans have some stake in the stock market, most Americans have very little. Here is the actual pattern of stock ownership:

Roughly 1/3 of the stock market is owned by the richest one percent of Americans; 2/3, by the top five percent; and the remaining 1/3 is spread thinly across the remaining 95 percent of Americans.

Given this concentration of share ownership, the goal of maximizing shareholder value means that that our great corporations are currently dedicated to making the rich richer. And that is in fact what is happening.

Since 1980, despite ups and downs, the country has grown at a reasonable pace. However, almost all of that growth has gone to the top one percent. This is entirely different from the three decades that preceded 1980. During that period the country also grew steadily, but the rich and the rest grew together.

This changed outcome has shown itself in two ways. The first and most visible is that CEO pay went up by a factor of about 10. The second, but far more important outcome is that wages have stood still.

There is a close connection between these two results. Holding down wages is enormously valuable to shareholders. It is a gain in profitability that far outweighs the cost of the increased compensation to top management. Today, with their grants of stock options, shareholders have motivated top management to hold down wages, and management, aided by globalization and the threat or the reality of offshoring, has succeeded in doing just that. Top management's very visible increase in compensation reflects their alignment with the shareholders in gaining from the resulting increase in profitability and share price.

This outcome has now become a system problem. Today's corporate leadership is not only motivated by stock options to put shareholders first, they also know that if they do not they will not survive. It is the shareholders who elect the directors and ultimately control the corporation's direction. Today's remote shareholders, and the hedge funds and other financial firms that usually represent them, have no interest in a corporation other than in its profits and its stock price.

But above all let us not make the easy mistake of simply attacking inversions. Inversions are only the highly visible sign of something much bigger. The real issue is not about inversions; it is about the goals of American corporations, and the fact that their present goals are destructive for America.

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You can't have it both ways...the president says frequently we are part of the 'global community' and need to behave that way as a country...except when a company who is rightfully paying attention to excessive tax versus other options...then the company is bad...which way do you folks want it? The author also is missing some major motivators common in human nature, believing instead that companies/people should just act altruistically despite the government application of usury tax rates relative to other industrialized countries. When will our government and economics like this one on the left learn that understanding and leveraging human nature will be much more effective at achieving results than name calling and trying to convince people to be altruistic. Focus on results, not name calling.

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If the stock market is at record highs, and companies are making record profits, and if record profits are being hoarded in offshore banks, and if wages have been stagnant for 35 years, and if 50% of all wage earners only take home $27,500 a year or less, and if corporations are paying less in taxes as a percent of GDP since 1960s, and the capital gains tax rate is still less than the top margin rate for wage earners, then I see no reason why the "job creators" (and their defenders) should have any complaints at all if the peons decide to pipe up once in a while.

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The article discussed the two major effects of inversions in corporate America today, extreme disparities of wealth for the few, combined with stagnant wages for the vast majority of Americans. A third, perhaps more important result was not included--the omission of desperately needed tax dollars from Big Business and large corporations to help pay their "fair share" for the repair and construction of roads and bridges, better schools, healthcare for the less advantaged, social services, and the infrastructure for our neighborhoods, communities, cities and our country. Such corporations have been the beneficiaries of favorable tax laws created in most part by our lawmakers and protected by armies of high priced accountants, lawyers and others. Most of the tax dollars paid today, are paid by hard working folks in the middle class and they are tapped out. Let's not sanitize the conversation--the thousand of lobbyists today are essentially practicing legal bribery which has become institutionalized. Those in line, working to achieve the "American Dream, namely young people, particularly in college, begin their journey with the albatross of thousands upon thousands of college debt--yes, even our respected colleges and Universities have joined the corporate bandwagon. Next time one is waiting in gridlock traffic for hours, driving to or from work, or observes the struggles of young people with daycare costs, rents, and the list goes on, re-convince yourself, with ostrich logic, that American corporations remain patriotic both here and abroad, and we, in the middle class simply don't understand.

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Human nature is to be greedy, and the current focus on results (those that increase shareholder value) is exactly the problem. The author is correct.

Since the concentration on shareholder value above all other concerns began, the wealthy have been effectively crowdsourcing their riches on the increasing pool of labor, but not increasing pool of wages, of the poor and middle class worldwide. Taxes on the wealthy and corporations are not excessive, regardless of our position versus other industrialized countries, when the wealthiest individuals have more money than their great-great-great-grandchildren could ever spend and corporations are sitting on so much overseas cash that they can't find enough other companies to buy.

The right often loves to accuse the left of pushing too much altruism, when it is usually the right (but admittedly not everyone on the right) who like to paint themselves as having religion and "God" on their side. God was all about altruism, but according to the right God would be a conservative, obviously. In practically the next sentence they condemn the "lazy" who "only want handouts." Sure, there are plenty of people who would like nothing better than to sit and collect free money. But whether someone is lying when they say they are needy is between that person and God. Whether a person with extra resources gives when called upon is between them and God. It is not the responsibility or the right of the wealthy to determine need.

The mindset of almost all the US wealthy, and by extension the corporations whose shares they hold, comes down to one simple thing, a paraphrase of the title of a Clint Eastwood movie. How much money is enough? A few dollars more.

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ultimately a corporation that doesn't put profits first fails it's employees you can't pay wages very long if your running in the red. Of course no one in the government can relate to that.
It's the government that's driving these companies off-shore by keeping corporate taxes high. Of course if any politician brings this up he is castigated as being a shill for the rich, but they get away with calling ruinous deficit spending "investing in America".

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I agree the real issue is not inversions but a lack of corporate values. We have examples of successful companies that prioritize some if not all of the 1981 Business Roundtable six constituencies; employees, customers, communities, society at large and suppliers and as a result they produce for shareholders. Examples are Apple, Amazon, Google, Patagonia, New Balance, Starbucks, Whole Foods and Zappos. Their leaders prioritize values and culture. It seems obvious that this formula works. Until more companies follow their lead, consumers can make a difference by spending their money with conscious companies.

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